Social Security gets a 3.6% raise in 2027, but a 22% cut looms by 2032: Could a 40% payroll tax hike make Millennials and Gen Z pay more?

Millions of retired Americans will get a little more money next year. On Oct. 14, the Social Security Administration (SSA) announced that benefits will rise by 3.6% in 2027. But the good news sits next to a bigger worry. The programme that pays these benefits is slowly running short of money, and the deadline for fixing it is getting closer.

A 3.6% raise from January

The increase is called a cost-of-living adjustment, or COLA. It starts in January 2027 and will reach nearly 72 million Social Security beneficiaries. According to the SSA, the average retirement benefit will go up by about $75 a month, from $2,095 to an estimated $2,170.

People who get Supplemental Security Income (SSI), about 7.3 million of them, will see their higher payments start a little earlier, on Dec. 31, 2026. Some people receive both types of benefit, so the agency says the raise will touch 76 million Americans in total.

The idea behind a COLA is simple. Prices keep rising, and benefits should not fall behind. The yearly raise is worked out from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which the Bureau of Labor Statistics tracks. Still, not everyone feels the number is fair. Some retirees and advocacy groups say this year’s raise is too small to match what they actually spend on daily needs.

Social Security could pay only 78% of scheduled benefits in 2032

The bigger concern is in the 2026 Social Security trustees’ report. It looks at two funds. The first is the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits. The report says its reserves will run dry in the fourth quarter of 2032. After that, the money coming in would cover only 78% of scheduled benefits, which means a 22% cut.

By 2100, that share is expected to slip further to 62%.

The second picture is wider. When the OASI fund is combined with the Disability Insurance fund, the total is called OASDI. These combined funds are projected to be empty by the third quarter of 2034. At that point, incoming revenue would pay 83% of scheduled benefits, falling to 65% by 2100.

Social Security will not shut down. Workers will keep paying payroll tax, and benefits will keep going out. The problem is that, without new revenue or changes in law, the programme can pay only as much as it collects.

SSA Commissioner Frank Bisignano, who also serves as CEO of the IRS, sounded calm about it. In an Oct. 12 interview with CNBC’s “Squawk Box,” he said, “It’s 90 years old, and it’ll be around for another 90 years. The president has promised to protect and preserve and that’s what we’re doing.”

Bisignano, who earlier ran a large Wall Street firm, also spoke about cleaning up the agency’s data. He said about 30 million records are wrong and that around 10% have been fixed so far. When asked about possible changes to benefits or the taxes that fund the programme, he declined to comment.

What Congress can do, and what it will cost

One option is a higher payroll tax. Right now, Social Security is mainly funded by a 12.4% tax on earnings, with workers and employers paying 6.2% each. The tax applies only up to a yearly limit, and that limit will rise to $192,300 in 2027 from $184,500 in 2026, the SSA says.

Advancing American Freedom, a conservative advocacy group, has run the numbers on this route. Its analysis says that if payroll tax alone were used to protect scheduled benefits, the combined rate would have to reach 17.3% in 2034, about 40% higher than today. Acting early would be cheaper. A jump to 16.65% right now, an increase of 34%, would be enough to avoid any benefit cuts, the group says.

The group also estimates the programme’s long-term shortfall at $29.3 trillion, or about $215,000 for every household.

Rachel Greszler, a senior research fellow there, said lawmakers can either let the automatic 22% cuts arrive in 2032 or bring in gradual, targeted reforms now. She argued that early action would protect lower- and middle-income retirees and strengthen the economy, and would show fiscal discipline before markets force sudden decisions.